Securitisation is the process whereby an entity (originator) sells in the market illiquid and non-tradable assets in exchange for cash (the so-called “traditional securitisation” or “true sale securitisation”) or sells only the credit risk associated with the assets (also called “synthetic securitisation”). The term securitisation derives from the core objective of the transaction, which is to obtain securities from the underlying instruments in the pool being securitised. The securitisation process includes further
participants and is divided in two basic steps. Firstly, the originator identifies the reference portfolio, a pool of assets it wants to remove from its balance sheet, and sells it to a bankruptcy-remote or insolvency-remote special purpose entity (SPE), also called special purpose vehicle (SPV). The main objective of this transaction is to obtain cash (to achieve a common cash flow pattern, the securitised assets shall have a sufficient degree of homogeneity).

A reverse repurchase agreement is the purchase of securities with the agreement to sell them at a higher price at a specific future date. For the party selling the security (and agreeing to repurchase it in the future) it is a repurchase agreement (RP) or repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement (RRP) or reverse repo. Repos are classified as a money-market instrument, and they are usually used to raise short term capital.

A bankers’ acceptance (BA) is a short-term credit investment created by a nonfinancial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market. Bankers’ acceptances are considered very safe instruments and are used extensively in foreign trade. Banker’s acceptances often arise from a business needing to make a major purchase overseas. BAs are time drafts that a business can order from the bank. The financial institution promises to pay the exporting firm a specific amount on a specific date, at which time it recoups its money by debiting the importer’s account. The BA works much like a post-dated check, which is simply an order for a bank to pay a specified party at a later date. The holder may also choose to sell the BA for a discounted price on a secondary market, giving investors a relatively safe, short-term investment.

Commercial paper is an unsecured, short-term loan used by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between one and two months being the average. Commercial paper is considered a very safe investment. Typically, only companies with high credit ratings and credit-worthiness issue commercial paper. Over the past 40 years, there have only been a handful of cases where corporations have defaulted on their commercial paper repayment.